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Chapter 7 homework

Chapter 7 homework. Number 2: Scott Anderson Number 4: Eikeem Barron Number 10: Kelly Beck Number 14: Meghan Bouvier Number 16: Thomas Caruso Alternate: Matt Herr. Chapter 8. Inflation and Prices. Real vs. Nominal Prices. Use to compare the price today to the past or future Real

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Chapter 7 homework

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  1. Chapter 7 homework • Number 2: Scott Anderson • Number 4: Eikeem Barron • Number 10: Kelly Beck • Number 14: Meghan Bouvier • Number 16: Thomas Caruso • Alternate: Matt Herr

  2. Chapter 8 Inflation and Prices

  3. Real vs. Nominal Prices • Use to compare the price today to the past or future • Real • Accounts for inflation • Gas prices in 2002 averaged $1.59. Adjusting for current inflation gas prices in 1974 would have been $1.57. • Nominal • Current prices • Quart of Milk was $0.40 in 1970 and $1.25 in 2000

  4. Example • 1970 CPI = 38.8 • 1999 CPI = 167 • Was there a little or much inflation?? • Much (especially in the 70s and 80s) • Milk prices were $1.05 in 1999 and $0.65 in 1970 • Was milk more expensive in 1999?

  5. What is 1999 milk in 1970 dollars? • (38.8/167)*$1.05 = $0.24 • Milk was less expensive in 1999 • What was 1970 milk in 1999 dollars? • (167/38.8)*$0.65 = $2.80 • Milk was more expensive in 1970

  6. Can we do it?? The following is a list of prices for housing in five different countries along with their CPI. For which country is the real cost of housing declining? Use year 2 as the base year in your answer.

  7. Life Lessons • Sometimes it pays to owe money. • Total payments for houses and cars are generally much higher than the purchase price. • However, going into debt may be cheaper than paying the full price up front. • Inflation reduces the burden of fixed payments. • However, lenders may become reluctant to make loans.

  8. Figure 8.1 Real and Nominal Interest Rates from 1964 to 2004

  9. Measures of Inflation • The Consumer Price Index (CPI) summarizes movements in the prices faced by consumers. • Measures how much more (or less) it costs to buy a given market basket from one month, quarter, or year to the next. • A market basket is the combination of goods and services that the typical consumer purchases during the period in question.

  10. Calculating the CPI (cont’d) • Calculating the CPI involves four steps: • Survey consumers. • The BLS determines what goods and services go in the market basket by conducting extensive surveys of what consumers buy. • The market basket consists of about 95,000 goods.

  11. Calculating the CPI (cont’d) • Survey retailers. • The BLS surveys about 23,000 retailers in 87 urban areas. • About 50,000 landlords or tenants are surveyed regarding the housing market.

  12. Calculating the CPI (cont’d) • Determine the cost of the market basket. • The cost of the entire market basket is found by multiplying the price of each good times the quantity in the basket. • Compare the cost of the market basket across time periods. • The base year serves as the basis for comparison with prices in another year.

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